Question

Consider IASB Chair Hans Hoogervorst’s concern that “the atmosphere around non-GAAP is one of distrust.” What leads to that distrustful atmosphere?

How does the proposed standard help resolve this issue of distrust?

Answer 1

The International Accounting Standards Board is proposing a new rule on how companies report profit and how they explain certain performance measures that go beyond generally accepted accounting principles.

The proposal is part of an effort by the accounting standards setter to compel companies to provide more detailed information to investors, Hans Hoogervorst, chairman of the IASB, said in an interview.

Under the current rules, companies present revenue and profit or loss in the income statement, but they’re not required to provide any specific subtotals in between. The global accounting-rule system known as International Financial Reporting Standards does not currently define operating profit or subtotals of income and expenses.

But the IASB, which sets standards in more than 140 countries, found that companies calculated operating profit inconsistently, using several different definitions. The behavior was confusing for investors, who rely on operating profit to assess a company’s margins and to help with forecasting future cash flows, Mr. Hoogervorst said.

The new rule would require companies to provide three new subtotals: operating profit; profit before financing and income tax; and another subtotal consisting of operating profit, income and expenses from integral associates and joint ventures.

Businesses also would be required to disclose information about certain management performance measures, which are a type of non-GAAP practice, in a note in their financial statements. Companies would have to explain why the management performance measures provide useful information, how they are calculated, and how they relate to the most comparable profit subtotal specified by existing standards.

Investors consider management performance measures helpful for understanding how a company views its financial results, but they have expressed concerns about the quality of the disclosures, Mr. Hoogervorst said.

“It’s not in the interest of companies that the atmosphere around non-GAAP is one of distrust, that they are too unbalanced,” he said. “But they might see that this new alternative is in their interest.”

The proposed changes could result in one new standard and changes to at least six existing standards. The IASB has asked for feedback over a period scheduled to run for more than six months, until June 30. The board does not expect the standard to go into effect until 2021 at the earliest.

The IASB and the U.S. standards setter, the Financial Accounting Standards Board, have worked to set standards with similar principles since abandoning in 2011 a joint effort to make their standards identical. The FASB has no standards comparable to the IASB’s proposals on non-GAAP transparency and profit subtotals. The U.S. Securities and Exchange Commission, however, requires companies’ earnings disclosures to reconcile adjusted measures with GAAP figures.

The FASB intends to monitor progress on the IASB’s proposed standard to see if there are opportunities to improve generally accepted accounting principles in the U.S., a spokeswoman for the U.S. standards setter said.